In the case of Cotton Petroleum Corp. v. New Mexico, 1988, the U.S Supreme Court ruled that a state could impose taxes on oil and gas production activities taking place on tribal lands within its borders without infringing upon federal law or violating principles of Indian sovereignty. The dispute arose when Cotton Petroleum Corporation challenged New Mexico's imposition of an oil and gas severance tax for operations conducted on Jicarilla Apache Reservation land leased by the company from both tribe members and non-members alike. The court held in a 5-4 decision that while tribes have inherent powers to govern themselves, they do not possess territorial jurisdiction over their reservations exempting them from state taxation laws if those laws don't interfere with tribal self-governance or federal interests.

In the dissenting opinion for Cotton Petroleum Corp. v. New Mexico, Justice Brennan argued that the majority's decision to allow a state to tax on-reservation oil and gas production by a non-Indian lessee was incorrect because it violated principles of Indian sovereignty and federal preemption. He contended that this taxation amounted to an intrusion into tribal self-governance as it would significantly impact the tribe's ability to attract non-Indian capital, which is crucial for their economic development. Furthermore, he believed that such state taxation interfered with federal policy objectives aimed at promoting tribal self-sufficiency and economic development. Therefore, in his view, these taxes should be preempted by federal law under established legal precedents.